Elsevier

Research Policy

Volume 49, Issue 1, February 2020, 103865
Research Policy

Blockchain and the evolution of institutional technologies: Implications for innovation policy

https://doi.org/10.1016/j.respol.2019.103865Get rights and content

Highlights

  • Blockchain is an institutional technology that lowers the cost of institutional entrepreneurship across economic systems.

  • Blockchain lowers the cost of institutional innovation by reducing the transaction costs associated with contracting.

  • Evolutionary modelling shows blockchain technology providing entrepreneurial opportunities for improved economic coordination and governance.

  • Public policies geared toward adoption and usage of blockchain is conceived as a new feature of innovation policy.

  • Potential gains from blockchain institutional innovation present opportunities for economic discovery, learning and policy coordination.

Abstract

For the past century economists have proposed a suite of theories relating to industrial dynamics, technological change and innovation. There has been an implication in these models that the institutional environment is stable. However, a new class of institutional technologies—most notably blockchain technology—lower the cost of institutional entrepreneurship along these margins, propelling a process of institutional evolution. This presents a new type of innovation process, applicable to the formation and development of institutions for economic governance and coordination. This paper develops a replicator dynamic model of institutional innovation and proposes some implications of this innovation for innovation policy. Given the influence of public policies on transaction costs and associated institutional choices, it is indicated that policy settings conductive to the adoption and use of blockchain technology would elicit entrepreneurial experiments in institutional forms harnessing new coordinative possibilities in economic exchange. Conceptualisation of blockchain-related public policy an innovation policy in its own right has significant implications for the operation and understanding of open innovation systems in a globalised context.

Introduction

Blockchain technology was invented in 2008 (Nakamoto, 2008). While it is undoubtedly still in the experimental phase of development and shrouded in technological, economic and political uncertainties, blockchain is nevertheless emerging as the core component of the next generation of the internet upon which digitally-native economic institutional infrastructure is being built (Berg et al., 2019a; Werbach, 2018). Blockchain technology (and other distributed ledger technologies that do not arrange data in blocks) is an internet-based digital protocol to operationalise a decentralised economy. Blockchain provides a digital platform for decentralised digital currencies (Abadi and Brunnermeier, 2018; Böhme et al., 2015; Narayanan et al., 2016), digital assets (through the token economy, Voshmgir, 2019), digital identity (through self-sovereign identity protocols), and so-called smart contracts (Szabo, 1994). These applications in turn enable innovations such as decentralised finance, decentralised digital platforms, and decentralised autonomous organisations (or DAOs) (Beck et al., 2018).

Rather than understanding blockchain as an example of digital platform innovation (as in Saadatmand et al., 2019), this paper treats blockchains as a technological architecture with distinct implications. ``Traditional” digital platforms (such as the social media and advertising platforms Facebook and Google) are firms that operate multisided markets (Rochet and Tirole, 2003). Despite the unique dynamics attributable to multisided markets, it is nonetheless still the case that those digital platforms are institutionally firms, insofar as they are governed centrally (where decision-making power is delegated from a large number of shareholders to a small group of managers). Blockchains, by contrast are digital platforms where `management’ is distributed, or decentralised, across a large number of token holders, block validators (miners in the case of Bitcoin), and developers (de Filippi and Lovelock, 2016).1

It is that distribution of governance that makes blockchain an ``institutional technology” (Davidson et al., 2018), distinct from industrial technologies. Industrial technologies are typically seen through a Schumpeterian lens: impacting on industrial productivity by adoption into firms (Nelson and Winter, 1982). By contrast, institutional technologies need to be seen through the lens of transaction costs and economic organization. As Catalini and Gans (2016) explain, the economic effect of adoption of blockchain technology is characterised by a lowering of verification costs and networking costs, both of which are forms of transaction costs (see also Luther, 2016). The primary effect of institutional technologies such as blockchain is on transaction costs of economic coordination and governance between a network of economic agents (Langlois and Robertson, 1995), rather than the productivity impact of innovation on an economic agent (such as a firm or household per se).

The innovation process of an institutional technology is different to that of an industrial technology. The blockchain innovation process is occurring through many sectors of the economy simultaneously and across different margins, including finance (Blandin et al., 2019), agriculture (Caro et al., 2018), trade and logistics (Allen et al., 2019a; Casey and Wong, 2017), healthcare (Zhang et al., 2018), creative industries (Mohan, 2019; Potts and Rennie, 2019) and government services (Jun, 2018). Since Nakamoto (2008) there has been substantial innovation around blockchain consensus mechanisms, constitutional design, programmable smart contracts on blockchains, and tokenisation. All taken together, this activity is usefully characterised as innovation in the digital technologies of governance through the emergence of experimental new protocol-based platform infrastructure to facilitate economic coordination.

Little attention has been given to institutional innovation in Schumpeterian models because institutions are traditionally slow to evolve (North, 1990). As an institutional technology, blockchain facilitates institutional entrepreneurship over new forms of economic coordination and governance. We can no longer abstract away from institutional evolution and still have a perspective on economic systems consistent with reality. Evolution of industrial technologies now takes place across multiple systems of institutional governance enabled by a diverse set of institutional technologies that evolve. This new class of technological change—the evolution of a technology of governance—requires new understandings of the dynamics of that change that are not represented well by standard replicator (Metcalfe, 1998; Metcalfe et al., 2006) or diffusion models (Bass, 1969). As institutional technologies are technologies of governance they require groups to adopt, not just individuals. Individuals choose institutional technologies based on the expected transaction cost of exchange and mutual expectations about adoption. Innovation in institutional technologies is at the competitive selection margin of lowered transaction costs.

If institutional evolution is best characterised as a new type of innovation with a new type of evolutionary economic process, then it also has implications for innovation policy. What Novak (2019) and Berg et al. (2019b) describe as ``crypto-friendly” public policy is an adaptive policy framework to facilitate the adoption of blockchain policy by the varied interests engaged in innovative practices. In a context of innovation of institutional technologies, crypto-friendly policy is innovation policy. Governments should adopt crypto-friendliness as a generalisable principle for policy, enabling the process of institutional evolution and competition to take place. Here governments seek to minimize the costs of structural institutional innovation and adjustment, including the coordination of seemingly unconnected policy domains within and across nation-states. Public policies which serve to facilitate blockchain investment, adoption and use enable the emergence of entrepreneurial discoveries over institutions by multiple actors (i.e., suppliers, and users, of blockchain applications and solutions), augmenting existing open innovation theories which are largely restricted to product and process innovations (von Hippel, 2005).

The paper proceeds as follows. Section 2 introduces and reviews concepts of institutional technologies vis-à-vis industrial technologies and their innovation dynamics. Section 3 presents an analytical representation of the innovation process for blockchain in a simple replicator dynamic model. This model demonstrates the difference between industrial adoption and institutional adoption. Section 4 then characterises the main implications of institutional innovation as it relates innovation policy and crypto-friendliness, arguing that crypto-friendly policy is innovation policy. Section 5 concludes.

Section snippets

Evolution of institutional technologies

Institutional technologies are processes and mechanisms that enable systems of governance for economic exchange. Williamson (1973, 1985) analysed several institutional systems enabled by institutional technologies including firms, markets and governments. The Williamsonian analysis of these institutional systems is often linked to the tradition established by Coase (1937). Transaction costs are the rationale for systems of institutional governance other than voluntary free exchange in markets.

Model

In Neo-Schumpeterian models of economic evolution, the core analytic conception is that the unit of variation, selection and replication is a complex industrial conception of knowledge (Dopfer and Potts, 2008). This knowledge is generally understood to refer to the technological capabilities of firms, thereby forming an industrial population (Nelson and Winter, 1982). Economic evolution is therein defined in the same way as in biology, as change in the population frequency of generic knowledge.

Blockchain crypto-friendliness as innovation policy

The model outlined in the previous section provides an institutionally-centred account of the extension of contract-laden coordinative possibilities within an economy via the suppression of transaction costs. Adjusting the costs of verification and monitoring of data integrity, and facilitating decentralised networks of exchanging economic value, blockchain is firmly conceptualised as a class of institutional technologies for contracting over the terms and conditions of realisable mutual gains.

Conclusion

Previously institutional innovations have been the domain of historians, not innovation economists. This is because institutional innovations have been mostly discrete and rare events punctuated by decades or centuries of stability. They are therefore parametric in even long run economic models and correspondingly also in innovation policy analysis and design. The emergence of blockchain technology, however, raises important questions for this implied institutional stability. Blockchains are

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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